Tags: CFTC | derivatives | regulations | reform

NYT: CFTC's Derivatives Regulations Are 'Setback for Financial Reform'

By Michael Kling   |  

New regulations from the Commodity Futures Trading Commission (CFTC) on derivatives are "a victory for Wall Street and a setback for financial reform," asserts The New York Times in an editorial, asserting the rules "may also signal worse things to come."

The new rules from the CFTC, as mandated by the Dodd-Frank Act, are supposed to bring transparency and competition to blurred industry blamed for contributing to the 2008 financial crisis.

The regulations call for derivatives, which help companies hedge against risks or speculate on financial markets, to be traded on open exchanges called "swap execution facilities."

Editor's Note:
 
The Truth About the Economy — Government Documents Lead to Eerie Conclusion

However, banks get to keep their old practices, The Times laments. Hedge funds, asset managers and corporations will have to contact just two banks when seeking prices for a derivatives contract, a big drop from the five banks the CFTC initially proposed.

The number is supposed to rise to three next year, but that's still inadequate, according to The Times. Plus, the delayed rule might never go into effect.

Although derivatives trading, now controlled by just five large banks, will be done on open electronic exchanges, much of the negotiations on prices can be done over the phone, which is difficult to monitor and prone to abuse, The Times adds.

Another defect is that the rules will not extend to foreign affiliates of American banks and foreign banks operating in the United States, The Times argues.

"Anything less broad would make a sham of derivatives reform."

The new rules are the best that CFTC Chairman Gary Gensler could get due to opposition from other commissioners, according to The Times. The problem is that Gensler's term has already ended and he's expected to leave at the end of the year.

"Given Wall Street's incessant lobbying and powerful presence in Washington, it is assumed that he will be replaced by a chairman who is friendlier to Wall Street. That bodes ill for rules that have started out weak and need to be shored up later."

The Securities Industry and Financial Markets Association (SIFMA) takes the opposite view, saying the rules are too restrictive. Minimum bid requirements, the group aruges, "will impair market liquidity at the expense of all market participants," says Kenneth Bentsen, Jr., SIFMA's acting president and CEO.

"Any minimum bid requirement will tie the hands of portfolio managers who already have a fiduciary obligation to serve the best interests of their clients," warns Timothy Cameron, managing director and head of SIFMA's Asset Management Group. "Requiring portfolio managers to broadcast their trading position more widely than they would otherwise choose could negatively impact the prevailing price of their trades, making it more expensive and difficult to hedge their clients' risk."

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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New regulations from the Commodity Futures Trading Commission (CFTC) on derivatives are "a victory for Wall Street and a setback for financial reform," asserts The New York Times in an editorial, asserting the rules "may also signal worse things to come."
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